DEFINITION of 'Prepaid Finance Charge'

Charges on a loan agreement which are not included as part of the principal amount being borrowed. Prepaid finance charges can include such things as administration fees, loan insurance and discount points. As these expenses are not a part of the "asking amount," they are considered to be prepaid in nature. These expenses typically must be paid by the borrower at the time of loan closing.

BREAKING DOWN 'Prepaid Finance Charge'

Prepaid finance charges, or closing costs as they are also commonly known, are common in lending agreements, including mortgage borrowing. While not directly incorporated in the cost of borrowing calculation for a loan, these expenses do affect the APR, as upfront fees should be included in the total cost of borrowing statement given to borrowers at loan signing, as is stated in Truth In Lending documentation.

RELATED TERMS
  1. Amount Financed

    The actual amount of credit made available to a borrower in a ...
  2. Prepaid Insurance

    Payments that are made in advance for insurance services or coverage. ...
  3. Stock Loan Fee

    A fee charged by a brokerage firm to a client for borrowing shares. ...
  4. Roll In

    A term which refers to including loan costs into the initial ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of ...
  6. Discount Points

    A type of prepaid interest mortgage borrowers can purchase that ...
Related Articles
  1. Personal Finance

    How To Read Loan And Credit Card Agreements

    The devil is always in the details! Find out what you're signing yourself up for.
  2. Investing

    What are Prepaid Expenses?

    A prepaid expense is an asset on the balance sheet. Due to accounting principles, expenses are often accrued on the balance sheet and expensed in a later period.
  3. Personal Finance

    Prepaid "Credit" Cards: Convenience At A Cost

    These cards offer convenience and security, but are they worth it?
  4. Investing

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  5. Personal Finance

    Interest-Only Mortgages: Home Free or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  6. Personal Finance

    Lending From A Loan Officer's Perspective

    Learn how a loan officer thinks, so that you can get the best and safest loan.
  7. Personal Finance

    Understanding Loans

    A loan is the act of giving money, property or other material goods to another party with the expectation of being repaid.
  8. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  9. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  10. Personal Finance

    States That Allow Car Title Loans

    Only some states permit car title loans – and those that do may have restrictions. Check this list to see what to expect.
RELATED FAQS
  1. Who benefits the most from prepaid expenses?

    Learn who benefits most when expenses are prepaid. Individuals and businesses often make payments, such as rent or insurance, ... Read Answer >>
  2. What are the differences between deferred expenses and prepaid expenses?

    Learn the difference between prepaid expense and deferred expense and how businesses use and record each in standard accounting ... Read Answer >>
  3. How are prepaid expenses recorded on an income statement?

    Understand how prepaid expenses are recorded on a company's financial statements. Learn why a prepaid expense would be considered ... Read Answer >>
  4. What transactions cannot be made using prepaid credit cards?

    Find out about the transactions that are restricted when you use a prepaid credit card, and find out about other ways to ... Read Answer >>
  5. How do prepaid expenses affect liquidity ratio calculations?

    Understand how prepaid expenses affect a company's liquidity ratio calculations. Learn about the most common types of liquidity ... Read Answer >>
Trading Center